Low Season: Hotel Boom’s Screeching Halt

Pop! That’s the implosion of New York’s seemingly indestructible hotel industry, which this January had one of its worst months of the past six years.

According to Smith Travel Research, an industry research firm based in Nashville, Tenn., the citywide occupancy rate in January was 59.5 percent, an annual decrease of 16.1 percent and the first time the occupancy rate slipped under 60 percent since 2003. Average daily room rates are down, too, falling from $229.10 last January to $199.05 this year. It’s the first time average rates fell below the Mendoza line since February 2006, breaking a streak of 34 consecutive months with an average rate of $200 or better.

Like the office and housing markets before it, the hotel industry is taking its wallops from the financial crisis. Whether it’s increasingly cost-conscious tourists, or a decrease in business travel, or tamer convention crowds, it is a fact that there are less and less people visiting New York these days and the hotel industry is suffering mightily because of it.

“There are two things going on here,” Sean Hennessey, chief executive of Lodging Investment Advisors, said. “First, the industry is suffering from the tremendous losses of the Wall Street community, which the hotel industry has become very dependent on; and, secondly, the strengthening of the U.S. dollar against other currencies has prohibited a great deal of the vacation and leisure demand.”

Ouch and ouch. Of course, the hotel industry has been through some difficult times before, including a short-lived downturn after Sept. 11. Unfortunately, this slowdown is not likely to be such a quick fix.

“This slump is a little broader than what we have seen in the past,” said John Fox, a senior vice president at hospitality firm PFK Consulting. And with the boom over, the industry will have to adapt to life outside the bubble.

That means, practically speaking for the industry and consumers alike, no more boom-time room rates. The city’s average daily rate peaked in November 2007, when it reached $333.73. Who knows how much further the rate—already below $200—will fall, but back in January 2003 the daily room rate averaged a very friendly $156.50 nightly.

Hilton Hotels, to provide just one example, is offering a “New York on Sale” promotion, with rates at six-year lows at three of their city hotels: the Hilton New York, in midtown; the Millennium Hilton, across from the World Trade Center; and the famous Waldorf-Astoria. And the low rates are good all the way through the next Christmas season, when rates are generally higher to match the holiday surge.

And if lowering rates doesn’t work, some hotels offer incentives to lure euro-counting tourists. The Mandarin Oriental, in the Time Warner Center, offers guests a complimentary night with any two-night stay as part of their “Extra Fun-Day Away” promotion. Granted, the nightly rate starts at $765, but a free night is a free night.

THE SUDDEN COLLAPSE in hotel demand comes at a time when thousands of hotel rooms have recently come online and even more are on the way.

In 2007 and 2008, according to Smith Travel Research, 5,018 hotel rooms entered the New York market, including swanky establishments like the Bowery from the tandem of Eric Goode and Sean MacPherson, and Robert De Niro’s Greenwich Hotel. With more than 80 hotels under construction and countless other projects in various stages of planning, there are thousands of more rooms yet to be added to an already oversaturated market.

Of course, the recession may halt many of these projects. Mr. Hennessey, of Lodging Investment Advisors, predicts that the majority of hotels that are not currently under construction may not get built until the next economic upturn, and nobody is offering predictions on when that will be. In the meantime, construction and hotel industry jobs will become less plentiful than in the past.

But the indirect effects of a stumbling hotel industry are even more severe than the direct consequences. With less people visiting New York and filling up the city’s hotel rooms, there are less people walking the streets and spending money in Fifth Avenue boutiques and Times Square tourist traps, which partly explains the paltry retail spending toward the end of 2008.

And it’s doubtful that anyone is cheering harder for a hotel industry recovery than Mayor Michael Bloomberg. According to Joseph Spinnato, president and chief executive of the Hotel Association of New York, a trade group, the city is about to embark on an ambitious, discount-based marketing campaign to boost tourism and leisure travel. “Mayor Bloomberg and his staff are very anxious to lure people into the city,” he said.

The mayor should be, since a thriving hotel industry is a bankable feather in the cap for an election season pol. After Sept. 11, George Pataki, facing reelection as governor in 2002, worked fervently to boost the city’s tourism in the wake of the terrorist attacks. The success (or failure) of the city’s current push could have wide-ranging political implications not just for the mayor, but for Governor Paterson as well, who is up for reelection in 2010.

As with most things, there are liable to be a few winners if hotels are forced to further reduce rates. Convention planners must be thanking their lucky stars. If you’re a Ford or General Motors executive, for example, suddenly the trip to the New York auto show in April does not seem quite as onerous.

And brides- and grooms-to-be are perhaps the biggest winners of them all. I know two couples getting married in the city this summer, and it’ll now be considerably cheaper and easier to find places for the wedding party to shack up than it was in 2006 or 2007, when the occupancy rate consistently hovered around 85 percent.

It’s unlikely there will be a market like that for a long time. “I don’t expect us to get back to the mid-80s occupancy rates that we had from 2005 to 2008,” Mr. Fox, of PFK Consulting, said. “It’s unheard of to have that kind of market over a sustained period of time.”